ISLAMABAD: Pakistan faced an imminent economic crisis at the start of the fiscal year (FY24), reflecting the impacts of inadequate macroeconomic management, surging world commodity prices, global monetary tightening, catastrophic flooding in 2022, and political uncertainty. Amid high inflation and weak confidence, and with reserves at dangerously low levels, the International Monetary Fund (IMF) approved a new Stand-By Arrangement (SBA) program in July 2023.
Steadfast implementation of the program— including through continued fiscal restraint, energy tariff adjustments, and the continued high policy rate—enabled new official external inflows early in the fiscal year, allowing a loosening of import management measures, and some recovery in confidence. The broad-based but still nascent recovery has been inadequate to reduce poverty, with growth expected to reach only 1.8 percent in FY24; the poverty rate is expected to stagnate at current high levels of around 40 percent.
A sustained recovery, with improved growth prospects, and poverty reduction will require deep reforms, and an articulated, ambitious, and credible economic reform agenda is required to reduce uncertainty and restore confidence. Risks remain very high, and key policy constraints to sustainable economic growth remain unaddressed.
Policy buffers to manage any shocks remain depleted, with high levels of debt and tightly constrained foreign exchange reserves. Under current policy settings, and unless a major structural reform program is durably implemented, growth is expected to remain muted amid continued very low investment, persistent external imbalances (likely necessitating continued import and capital management measures), distortionary fiscal policies, and a large state presence in the economy.
Without major reforms, no significant poverty reduction is expected over the medium term. Financial sector stress, looming policy uncertainty with potential policy slippages, climate change-induced shocks and natural disasters, and external headwinds all pose very high risks to the outlook. A more robust medium-term recovery will require the implementation of significant medium-term reforms to:
• Improve the quality of expenditures and reduce the distortive presence of the state in the economy including SOE reforms and privatizations, reduced untargeted subsidies, and reduced federal expenditures in areas devolved to provinces.
• Broaden the tax base including increased taxes on agriculture, retail, and property, reduced tax exemptions and loopholes, and improved administration, particularly via digitalization.
• Address regulatory constraints to private sector activity including cutting red tape and removing barriers to foreign investment.
• Removing the anti-export bias in trade policy including tariff rationalization and reform of export subsidy schemes.
• Address inefficiencies and high costs in the energy sector including continued tariff reform and increased private sector participation in distribution and transmission.
